Are Southern States Justified in demanding more states’s share from Union Tax Revenue?
Days before introducing the budget in the state assembly, Karnataka Chief Minister Siddaramaih organised a protest in New Delhi, asserting that Karnataka has been unfairly treated in the allocation of states' share of centrally distributed tax funds. He wrote on X (formerly twitter) that Karnataka gets back only 15 paise for every rupee it pays to the centre. Joining him in solidarity, DMK Rajya Sabha MP P Wilson wrote in a news paper oped that all South Indian states are disadvantaged in the central tax share, with Karnataka, Tamil Nadu, Telangana, Andhra Pradesh, and Kerala respetively receiving 12 paise, 24 paise, 31 paise, 49 paise, 50 paise for each rupee they trasfered to the Union government in 2022-23 period 1 . He alleged that allocation of resources in this manner represents discrimination against South Indian states despite their superior performance the in regulating population growth, economic performance, and tax revenue sources. Kerala CM Pinarayi Vijayan and Tamil Nadu CM MK Stalin joined these protests, demanding fair allocation of resources to southern states.
In response to these claims by opposition leaders, Union Finance Minister Nirmala Sitharaman strongly rebutted their assertions. Her response included two key dimensions. Firstly, she argued that economically prosperous states, which also significantly contribute to tax revenue, host metropolitan cities and serve as hubs for numerous National and International businesses. Also, the workforce in these cities comprises of people from across India, who contribute to the taxes generated from these states. Secondly, she the finance minister blamed fiscal pressure on their state budgets to reckless free bee schemes introduced by the opposition led state governments.
The non-NDA political parties leading the governments in all the southern states marks significance in this scenario. As the chief ministers from the Congress, the DMK, and the CPM raised this issue before the elections, the BJP leaders dismissed it as an election gimmick. Additionally, objecting these allegations from the opposition leaders, some BJP leaders labelled them as forces aiming to break apart 'Bharat.' Amidst these narratives, I attempt to understand the demands of opposition leaders from these states for fair allocation of resources.
Neoliberalism, inequality, and aspirations:
The growth strory of indian econonmy after adopting neoliberal policies characterises the emergence of growth corridors in the West and South, which experienced high economic growth rates. However, the benefits of this growth have not uniformly translated into improved living standards for all. Within these growth corridors, the pursuit of neoliberal policies in India have disproportionately benefited the rich and the urban middle class segments of the population, leaving the majority grappling with stagnant economic prospects and escalating unemployment, particularly among the youth.
While this argument has been substantiated by numerous studies, including Thomas Piketty’s renowned book on inequality, it is crucial to recognize the disparities in living conditions between the majority in growth corridors and those in other regions. As the concept of relative poverty has gained traction, scholars widely acknowledge that aspirations are relative to one's social setting. The varying growth rates across different regions in India have consequently shaped differing aspirations among their inhabitants. Thus, the financial expectations of the bottom half residing in growth corridors tend to be higher than those of the same segment living in other regions.
Amidst soaring inequality and youth unemployment, increased social and welfare spending represents a crucial governmental response. While the schemes give the impression of vote garnering tactics of political parties, they in essense plug the gap between the citizen expectation of better tomorrow, and the inability of the governments to deliver the neoliberal promise. Therefore, it needs to be understood that the increase in number of direct cash transfer schemes and other welfare initiatives in these regions aim to assuage public frustration stemming from unmet promises of robust economic growth. However, these schemes entail substantial financial outlays and strain state exchequers.
Federalism, and Autonomy in policy planning and resource allocation:
Since assuming power in 2014, the Modi government's policies have curtailed the financial autonomy of states, a fundamental tenet of Indian federalism. After implementing the Goods and Services Tax, the states have complained about the net loss of their indirect tax revenue. While the govt compensated the loss of revenue for a few years, it ended despite the states have not recovered from the losses. Despite the 15th Finance Commission recommending a state share of 42%, similar to the previous commission's suggestions, the actual allocation of taxes from the center to the states, factoring in cesses and surcharges, stands at less than 32% 2 .
The distribution formula of the 15th Finance Commission gives major weightage to income distance, measured by considering the difference between per capita GSDP of a state from the highest per capita GSDP state. While the idea of bringing equity among spending capacities of states is a just principle, the considerations and preferences of the citizens can not take the back seat in policy design. Moreover, the per capita expenditure of individuals living in these so-called growth corridors does not meet the global standard of $5.5 for a person per day, cash transfer schemes are not wasteful dole-outs; rather, they serve a vital purpose.
Against the backdrop of Southern states' efforts to manage the frustrations of their citizens, the reduction in fund transfers from the central government to these states constrains their ability to invest in infrastructure development. While shifting away from neoliberal jobless growth towards a job-creating economy with increased investments in public sector undertakings is a viable option, these governments often adopt the more pragmatic approach of working within the neoliberal economic framework. They design policies aimed at mitigating frustrations stemming from unmet promises of a better future. At this juncture, it looks like the tug-of-war between these states and the Union government for a greater allocation of funds is likely to persist in the near future.
